Why govt bent on dismantling profitable oil PSUs? (6 Oct 2003)

We can now congratulate the government, or rather; its Cabinet Committee on Disinvestment (CCD) for choosing the sensible option of not confronting the Supreme Court, on what is essentially a correct judgment.
On Friday night, the ruling coalition dropped its belligerence and decided on the sensible course of pursuing other divestments that were not banned by the court order. Let’s not get tied up with minor details such as the judgment quality and the exact issues that it relied on in drawing its conclusions.
In a nutshell, the Supreme Court said that the two oil companies could not be privatised through a convenient interpretation of their Nationalisation Acts without taking the matter to Parliament. This affects a few other companies as well.
Significantly, this is exactly the view that was expressed by senior jurists Fali Nariman and Shanti Bhushan, who fought the Public Interest Litigation (PIL) against the oil company privatisation. It was also the view expressed by four eminent jurists — Justices V. R. Krishna Iyer, O. Chinappa Reddy, P. B. Sawant (all retired judges of the Supreme Court) and Justice Rajinder Sachar (retired Chief Justice, Delhi High Court) in an unusual signed statement. Former Law Minister Shanti Bhushan was also a signatory to this statement and former Disinvestment Commission Chairman G. V. Ramakrishna concurred with this view.
Surely, they couldn’t all be wrong or biased against disinvestment? Also, notwithstanding the extreme interpretation of the judgment in most of the media, the CCD decision itself establishes that the Supreme Court ruling had not stopped all privatisation, nor would it dismantle previous divestments like those of Maruti Udyog. In fact, even the State Trading Corporation is not barred from being disinvested, as was claimed by some experts.
The CCD has correctly realised that there are other PSUs that can be safely privatised without falling foul of the Supreme Court or Parliament. And although it hasn’t given up on the two oil companies as yet, its decision to divest STC, Engineers India Ltd, Balmer Lawrie, Tide Water Oil (India), Hindustan Newsprint and Hoogly Printing Press are a part of the understanding that the divestment programme can go on uninterrupted. But there is still a catch. The CCD’s good sense in not challenging the Supreme Court, however, does not extend to all decisions last Friday.
For starters, there is this obsession with dismantling the large and profitable public sector oil companies. Since Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) are temporarily off bounds, the CCD reversed its own earlier decision and brought Indian Oil Corporation (IOC) back on the divestment list.
The objective is to bring at least a part of India’s massive public sector oil retailing infrastructure under private ownership. And the fact that neither Reliance, Essar or Shell have a retailing network, or seem inclined to undertake the difficult job of setting up a retail chain from scratch probably explains the pressure on government to privatise the oil companies before the elections.
The CCD on Friday decided to chop up IOC, which is the world’s 17th largest oil company into three parts. It would first separate the non-saleable parts of IOC and merge them with HPCL/ BPCL. The company would then be split in two, with the retail network separated from the refineries.
This will allow the government to privatise 52 per cent of the country’s oil marketing infrastructure. This includes 6,500 retail outlets that IOC owned and another 1,500 it acquired after paying a huge price from IBP. Would IOC, India’s only company on the Fortune 500 list, have any chance of remaining profitable when its marketing infrastructure is hacked off? The answer is no.
The decision is certainly a blow to IOC, but it also exposes the government’s lack of clarity and direction with regard to the oil sector, unless other interests are driving the decisions. IOC and Gas Authority of India Ltd (Gail) were taken off the disinvestment list a couple of years ago, and that is why IOC was allowed to bid for and bag IBP at a huge price.
However, thwarted by the Supreme Court in its attempt to sell two other oil companies, the government has arbitrarily chosen to take IOC to the chopping block. Stripped off its retail network, IOC will be deliberately weakened and brought on par with private companies such as Reliance, which own refineries but have no marketing network. In fact, it will be worse off.
IOC’s eight sprawling refineries are not new, compact and modern like those of its private sector competition. And without the marketing network, which will be forcibly separated from it, the company would have to depend on the successful private or MNC bidder, who buys its own outlets to sell its oil.
It is not yet clear if the Disinvestment Ministry plans to strip all of IOC’s 8,000 retail outlets away from it, or leave it with enough to ensure its independence. Either way, it will face a Catch-22 situation. Splitting the retail network is bound to be messy, acrimonious and could lead to more public interest litigation. On the other hand, stripping IOC’s entire retail network away will leave the PSU weak and bleeding.
How can any privatisation programme be justified, if it weakens and bleeds and destroys State-run companies that have been set up at a huge public cost? It makes no sense so far. Will all government decisions until the next general elections be dictated by political compulsion? And can the ruling coalition be allowed to destroy profitable public sector companies merely because the opposition is too weak, clueless and too fragmented to protest? There are 232 Central public sector companies of which 102 make losses. But a hundred others can be successfully divested without controversy. Why is the government bent on dismantling the profitable oil infrastructure without a national consensus? And is a greater role for the private sector in the oil business really in national interest?
We only have to look at the US for an answer. The private oil companies have such a hold on the American government, that they are accused of driving the country into an outrageous, expensive, mindless and debilitating war with Iraq simply in order to control its oil interests. -- Sucheta Dalal